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Awarding prizes for non-innovation

By Rutger-Jan van Spaandonk

On 6 December of last year, Eskom received the Financial Times Global Energy award for Power Company of the Year 2001 because, according to FT: “Eskom has proved its ability to provide the world’s lowest cost electricity to its customers while developing economical, efficient and safe methods of combustion of very poor quality of coal“.

This remarkable feat has not received much attention, but now that Eskom is using the cost advantage in its advertising campaign, the time has come to examine its claims – and the basis for FT’s decision – in more detail.

In its advertisements, Eskom proudly compares the price of a unit of energy (kWH) in South Africa to that in other countries, concluding that South Africa has the lowest electricity prices in the world. To share their data with you: South Africa – 2.43 US$ cents, Finland – 3.52 US$ cents, Italy – 7.92 US$ cents and the USA – 7.54 US$ cents.

However, if you look at Purchasing Power Parity (PPP is a measure of the relative purchasing power of different currencies; it is measured by the price of the same goods in different countries, translated by the exchange rate of that country’s currency against a “base currency”, the int$) the story looks rather different: South Africa – 6.45 Int$ cents, Finland – 3.52 Int$ cents, Italy – 10.85 Int$ cents and the USA – 7.54 Int$ cents. All of a sudden, South Africa’s electricity is 80% more expensive than in Finland, the lowest cost country.

But is it fair to use PPP numbers, you might ask. Yes, it is. Especially since Eskom in its latest annual report indicates in another, more outdated comparison of electricity prices, that “relative purchasing power of the respective currencies is not reflected in these values”. You would not put in this disclaimer if you felt that it did not matter.

It is questionable whether the so-called lower prices are the result of Eskom’s strategy or competences. The Deputy Minerals and Energy Minister Susan Shabangu has admitted herself that the low prices are the result of cheap coal, previous exemption from tax (Eskom started paying taxes in 2000) and dividends, and the fact that there is overcapacity and the existing capacity has been depreciated already. Other sources claim that the low return on assets of around 11% – which should be closer to 16% to attract foreign investors – also contributes to the electricity prices being lower than they ‘should be’.

So, we should expect the prices to rise when Eskom has to start adding capacity, or attract private capital. Bear in mind that Eskom already asked for a 7.4% increase (2% points above inflation) to be allowed at the end of last year, although the NER only approved 6.2%.

The second claim to fame pertains to Eskom’s skill at combusting coal. Eskom generates 95% of electricity consumed in South Africa (the rest is imported) of which 92.5% is generated by coal-fired power stations.

The last time I checked, scientists were still convinced that the global climate is changing due to the increase of greenhouse gases in the atmosphere, which is largely caused by using carbon-based fuels, and of which coal seems to be the most polluting.

This is the reason why governments, utilities, oil companies, car manufacturers and the likes are looking for alternative energy sources. To foster innovation and encourage these attempts, prizes should be awarded for advances in the field of fuel cells, solar and wind energy, or even nuclear power (such as Eskom’s pebble-bed modular reactor project) – not for better burning of coal.

Clayton Christensen showed very convincingly in his seminal 1995 book “The Innovator’s Dilemma” the difference between firms that focus on sustaining technological change versus the ones that do disruptive technological change. Companies in the first category incrementally improve the technology that form the basis of their business model (such as using coal as fuel in power stations), whereas truly innovative firms break the mould by using completely new, paradigm shifting technologies, and over time ‘creatively destruct’ the businesses in the first category.

What is more, the author shows that the performance of disruptive technologies in the beginning under performs the existing technologies (think solar energy), and that they are only applicable in small and emerging markets (think fuel cells), and thus not attractive to incumbent companies and their customers. Therefore, a company’s decision not to invest in disruptive technology often seems very rational!

All in all, electricity in South Africa is not as cheap as we are led to believe, and we should brace ourselves for substantial increases. Furthermore, Eskom needs to be careful not to fall in the trappings of sustaining technological change. But if they ever do, they will have a trophy from the Financial Times to show for it.

Rutger-Jan van Spaandonk is the founding director of FutureForesight Group, a boutique strategy consultancy. He can be reached via mailto:rj@futureforesight.com.

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Posted in the category: Insight

Assessing South Africa

By Clifford Modiselle

Historically, psychometric assessments have a bad reputation, mostly due to such assessments being conducted under a veil of secrecy as to their purpose and use. Pre-1994, in particular, corporates did pretty much as they pleased, and assessments where frequently used as much to promote certain people inside organisations as to keep other types out.

At the time, no legislation existed to govern the assessment of employees, or the processes and procedures to be followed when conducting such assessments. This changed with the promulgation of the Labour Relations (LRA) and Employment Equity (EEA) Acts in 1995 and 1998 respectively. The EEA specifies that tests must be reliable, fair, accurate and not biased against any group. Around this time the Health Professionals Council of SA also started to make its presence felt and took a strict approach to how these assessments where used by corporates.

The above changes notwithstanding, people are still suspicious of assessments based on previous experiences where they were not told what was being assessed or how the assessment would be used, and were not provided with feedback.

Further, most assessment tools are developed in the US or Europe and are not standardised to the South African population.

There is also still a lack of understanding about how psychometric assessment tools are used and how they work. Individuals are frequently not told what a test is assessing for, many companies do not link these assessments to competencies for specific jobs, and individuals do not know or understand how the tools link to the work environment.

So what are we testing for?

On an individual level, assessments can be used to recruit the correct individuals and ensure that individuals are appropriately placed within an organisation. If an organisation has clear competencies mapped to each specific role it can correctly recruit to fill that role.

Secondly, assessments can be used to identify raw talent. Skills and resources are rare and thinly spread in South Africa. Using psychometric assessments, organisations can identify talent, recruit and train it to fill the gaps it has.

These tools can also be used for self-development and career guidance. Sharing of information about the tests and their outcomes is critical here – individuals cannot know what areas they need to develop if that information is not shared with them in a constructive fashion.

On a broader level, these tests can be used to assess teams – either by revealing which team members are strong in which areas in an existing team and ensuring that future recruitment fills skills gap, or when building a team by providing an understanding of the people involved.

Taking a step up, an organisation can use these assessments to conduct pro-active risk identification and management. For example, assessing an individual before moving them into a high-risk environment to determine their suitability. It can also manage talent effectively by using these tools to identify potential future leaders. A further aspect is cultural mapping and refining, which ensures that individuals being brought into the organisation are suited to its culture and environment.

Lifting the veil

A comprehensive education campaign is needed at an industry and organisational level, from the top down, to demystify assessments tools and the assessment process. Additionally, companies need to communicate more effectively – people come to us for tests not knowing why they’re being assessed. Thirdly, it is critical that testing organisations and HR departments select assessment tools that are appropriate to the local environment and comply with local legislation. These tests then need to be appropriately matched to what is being tested for – different tools are needed for recruitment versus career development. Lastly, and very importantly, there is a lot of work we can do in terms of research and development to develop tests around SA norms that are sensitive to the uniqueness of the South African context. Education systems were not equal in the past and educational imbalances exist, it is important that assessments take this into consideration.

Clifford Modiselle, co-founder and director, Joint Prosperity

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Posted in the category: Insight, News

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The Big Change is a business strategy blog and newsletter published by Arthur Goldstuck, managing director of World Wide Worx, a leading technology research organisation based in Johannesburg, South Africa.

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